You've seen it on your bank statements, in your financial applications and all over the news — but what does good credit actually mean? And, what does it take to obtain and preserve it?

What is a good credit score?

Let's start with the basics. Your credit score is a key component of your financial wellbeing. It helps lenders determine how reliable you are as a loan borrower and the rate you’ll pay for home loans, vehicle loans and personal loans.

When purchasing something big, like a home, a good score could potentially save you tens of thousands of dollars in interest payments. The most common credit score range is 300 to 850, which is used by the two main scoring models: FICO® and VantageScore® (your financial institution or credit card issuer may use a different model). The higher the score, the better the available financing options and rates.

Your credit score is calculated using pieces of data in your credit report that are grouped into five categories: payment history (35% of your score), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

So, what exactly is considered a good credit score? According to Investopedia, lenders generally interpret credit scores as follows:

• 800–850: exceptional
• 740–799: very good
• 670–739: good
• 580–669: fair
• 580 or less: poor

If your score is 670 or above — keep up the good work! Maintain your good spending and on-time payment habits and continue checking your score regularly. When you have a good, very good or exceptional credit score, you aren’t seen as a high risk to lenders and you’ll likely receive better, or even the best, interest rates a lender can offer. If your credit score is fair or poor, you are considered a higher risk for lenders, and may have to pay a higher interest rate or be outright declined.

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What not to do

It’s important to know what helps you get a good credit score. But before we explore that, here are a few things that can negatively affect your credit score.

Make late bill or loan payments

This is the main factor affecting your credit score. Your payment history shows lenders whether or not you’re able to pay your bills on time. The payments that are most important to your credit are:

• Credit card bills
• Car loans
• Mortgage loans
• Student loans

One late payment shouldn’t affect your credit score, but if you have several late payments, you can expect your score to drop — possibly significantly.

Don’t pay your bills at all

Want to know what’s worse than late payments? No payments! If you fail to make at least your minimum credit card payment after 180 days, then your account is charged off. This means the creditor writes off your balance as bad debt and uncollectible, but they’ll still come after you for the payment. And if that’s not bad enough, a charged-off account stays on your credit report for seven years.

Keep a consistently high credit card balance

Let’s say you have a credit card with a $10,000 limit. If you’re consistently using 50% or more of your limit, which is $5,000 or more in this case, then your credit score could be negatively affected. It’s recommended to keep your credit card debt below 30% of your limit.

Close old credit accounts.

Approximately 15% of your overall score is determined by how long you’ve had your credit. Lenders look at the age of your oldest credit account, as well as the average age of your combined accounts. Closing old credit cards shortens your credit history which could lower your credit score.

Ignore your credit report

Credit errors happen. If you’re not checking your credit report regularly, a low credit score could be the result of incorrect information. Imagine walking into a meeting with a loan officer thinking your credit is good to go, only to find out that your score isn’t as high as you thought. Instead, it’s showing unpaid medical bills — which you know you’ve paid in full. You’ll probably be able to get it cleared up but, in the meantime, you are stuck paying a higher interest rate on your loan.

Submit several credit inquiries in a short time span

Whenever you apply for a new credit card or loan, an official inquiry is made on your credit report. Multiple inquiries in a short amount of time deduct points from your credit score.

Carry debt that is exclusively either credit cards or loans

Credit cards are considered revolving debt. Loans, like mortgages and auto loans, are referred to as installment debt. If you have only one type of debt, your credit score can take a negative hit. About 10% of your score is based on having a mix of these two types of debts.

Refuse to pay child support, parking tickets or taxes

Unpaid child support is debt. Unpaid parking tickets, after a certain amount of time, can be sent to collections. Unpaid taxes can lead to a tax lien against you. You may not immediately think of these things when considering your credit score, but they all have the power to negatively affect your score if left unpaid.

How to boost your credit score

If your credit score isn't in the higher range, don't panic. There are ways to give your score a quick boost and continue to improve it over the next few years. Some you can even start today.

1. Check your credit report for any discrepancies

Order a copy of your credit report from the major credit bureaus (Experian®, Equifax® and TransUnion®). If you see anything unusual, contact the credit bureau or your financial institution as soon as possible to find out how to resolve the issue.

2. Improve your credit utilization ratio

Work to improve your credit utilization ratio (amount of credit used versus total credit available) by increasing your credit limits, opening a new account and paying down your credit card balances.

3. Pay your credit card bills on time every single month

Show the credit bureaus you're serious about paying on time. Aim to make two small payments each month instead of one large one. This shows your level of responsibility and dedication to paying off your debt.

4. Establish financial goals

This is another way to gradually improve your score over time. Set a budget that you know you can stick to and be sure to include a debt repayment schedule. Shop around for the best interest rates and reduce frivolous spending. As you begin making big, important decisions—like buying a car, finding your dream home, etc.—different lenders will require different scores. Cultivate responsible habits to improve your score and work with your lender to determine how your score can help you secure the best loan.

5. Use a financial tool that lets you check your credit score for free

Choose a financial institution that allows you to regularly check your credit score for free. If you’re a Mountain America member, you can easily do this on our mobile app.

To find additional ways to improve your credit score, take the opportunity to meet with a financial professional at Mountain America Credit Union.

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